Netflix Inc. (NFLX) shares are down 3.1% in afternoon trading today as Andrew Left of Citron Research issued a short-sale recommendation on the company with a $300/share target price. In addition to Left’s recommendation, Eddy Cue, Apple Inc.’s (AAPL) services head, stated that Apple would not be interested in an acquisition of either Netflix or Walt Disney Co. (DIS), but would rather create its own video content. Finally, the Financial Times published an article today questioning Netflix’s $331.44 historical high it hit last Friday which translates to “a dozen times the $12 billion of revenues reported last year, 120 times the profits it expected.”
Short sellers are up $209 million today in mark-to-market profits, putting a slight dent in their $2.95 billion of year-to-date mark to market losses incurred as of last Friday. Shorts are now down $2.74 billion for the year, down -50.17%. This follows a $1.78 billion mark-to-market loss in 2017, down -41%, when average short exposure was $4.4 billion.
While Andrew Left was partially correct when he mentioned that NFLX “short interest at 10 year low”, its 20.6 million shares shorted is actually the lowest level of shares shorted since June of 2002, two months after its IPO. NFLX $ short interest is now $6.8 billion, an increase of 63% for the year and the highest level of short exposure in the stock’s history. In actuality, the main reason shorts have been buying to cover their outstanding short shares was because NFLX’s stock price kept rising and they needed to trim their shares shorted to remain within their dollar risk limits.
Gauging or comparing short interest by looking solely at number of “shares shorted” or “shares shorted as a percentage of float” ignores the stock’s price component and market cap in the analysis. For example over the last year, Rite Aid’s (RAD) shares shorted increased from 42 million to 122 million shares but short exposure barely increased, up $6 million to $212 million, while NFLX shares shorted decreased by 2.2 million shares, to 20.62 million shares shorted, but short interest nearly doubled to $6.8 billion. Similarly, looking at Rent-A-Center’s (RCII) 68% short interest as a percentage of float one would think its short exposure/dollars at risk dwarfs NFLX’s 5% short interest as a percentage of float. But in actuality, RCII’s short exposure is only $251 million, less than 4% of the dollars at risk put on by NFLX short sellers.
Bottom line, there are many reasons why an investor would short NFLX stock, but Andrew Left’s comment that NFLX short interest is at recent lows is not accurate – shorts have actually been increasing their NFLX exposure in 2017 and 2018 even as they’ve incurred over $4.5 billion in mark-to market losses over that time period.
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Managing Director Predictive Analytics, S3 Partners, LLC
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